Opinion: The Stock Market Is on Shakier Ground Than Wall Street Seems to Think

Key Points

• Economic uncertainty and steep valuations present key risks for stocks.

• However, analysts remain overwhelmingly bullish.

• 10 stocks we like better than S&P 500 Index ›

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Could the stock market be on shakier ground than Wall Street seems to think? I believe that many analysts (although not all of them) are painting a picture that's much rosier for stocks than actually exists.

I'm not trying to spread doom and gloom. However, pretending that a situation is better than it really is doesn't help investors. On the contrary, it could cause problems.

Image source: Getty Images.

Wall Street should know the market is on shaky ground

Few Wall Street analysts think President Trump's tariffs are helpful overall. As Fortune magazine's Alena Butros wrote earlier this year, "[A]nalysts are largely unanimous: The tariffs are going to be bad for trade, bad for stocks, and bad for economic growth." Wall Street knows that tariffs can hurt corporate profit margins and reduce consumer demand.

Just because the S&P 500 (SNPINDEX: ^GSPC) is up solidly this year hasn't changed most analysts' minds, by the way. As Charles Schwab's (NYSE: SCHW) Michelle Gibley put it, "It is likely that the economic impact of higher tariffs is delayed, not averted." Smart analysts understand this.

In just the last few days, UBS (NYSE: UBS) estimated a 93% risk of a U.S. economic recession. JPMorgan Chase (NYSE: JPM) pegs the odds of a recession at 40%. Goldman Sachs (NYSE: GS) thinks the chance of a recession is 30%. Other analysts don't expect a recession but predict stagflation -- a mixture of stagnant economic growth and rising inflation.

Analysts also know that stock valuations are frothy. I doubt there's anyone on Wall Street who isn't aware that the S&P 500 Shiller CAPE ratio is at its third-highest level ever.

S&P 500 Shiller CAPE Ratio data by YCharts

Most analysts probably also recognize that the Buffett indicator (a ratio of total stock market capitalization to U.S. GDP) is over 213% -- the highest level recorded so far. They're almost certainly familiar with Warren Buffett's 2001 warning that anytime this metric approaches 200%, investors are "playing with fire."

With all of this in mind, you might expect that Wall Street would be cautious about recommending buying many stocks. But is that the case? Nope. A whopping 405 stocks in the S&P 500 have consensus analyst ratings of "buy" or better. How many S&P 500 stocks have consensus "sell" recommendations? A grand total of four.

More seeming inconsistencies

As the infomercials say, "But wait! There's more!" The consensus 12-month price targets for 44 S&P 500 stocks are below their current share prices. Analysts as a group still recommend buying 21 of them. To be fair, we could see upward price target revisions soon for some of those stocks. For example, Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) recently received good news from a federal judge that lowers its risk level. I suspect the price targets for the stock will move higher as a result.

Here's another head-scratcher. Analysts know that share prices tend to track with earnings growth over the long run. Wall Street predicts negative earnings growth over the next five years for 40 stocks in the S&P 500. However, 22 of those stocks have consensus "buy" or better recommendations.

Interestingly, analysts project average earnings growth of below 5% over the next five years for 64 S&P 500 stocks. Thirty-nine of those stocks have consensus "buy" or better ratings. You'd think that prudent analysts would rather recommend investors put their money in practically risk-free short-term U.S. Treasuries with yields of over 4% than buy a stock whose earnings are likely to grow less than 5%.

What should investors do?

There's enough evidence for me to believe that the stock market is on shakier ground than Wall Street seems to think. What should investors do if I'm right?

I think Buffett's approach is worth following. He famously doesn't rely on Wall Street's perspective on the stocks he buys. The legendary investor does his own homework, evaluating underlying businesses, growth prospects, and valuations before putting even one cent into a stock.

Buffett has also built a hefty cash stockpile for Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). That could be a smart move for other investors as well, considering the market risks we discussed earlier.

Importantly, though, Buffett isn't panicking. He still owns dozens of stocks, many of which he doesn't plan on selling regardless of what the stock market does. Buffett knows that a well-diversified basket of stocks will likely deliver positive returns over the long term.

Even if I'm wrong about the stock market, Buffett's strategy should be a good one to follow. And maybe I am wrong. But I'm not convinced that Wall Street is completely right, either.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Charles Schwab is an advertising partner of Motley Fool Money. Keith Speights has positions in Alphabet and Berkshire Hathaway. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2025 $92.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.